Financial Frictions, Asset Prices, and the Great Recession Zhen Huo - - PowerPoint PPT Presentation
Financial Frictions, Asset Prices, and the Great Recession Zhen Huo and Jos e-V ctor R os-Rull University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP, CEPR, NBER University of Mannheim Sept 24, 2013 Very Preliminary
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Zhen Huo and Jos´ e-V´ ıctor R´ ıos-Rull
University of Minnesota, Federal Reserve Bank of Minneapolis, CAERP, CEPR, NBER
University of Mannheim Sept 24, 2013
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2004 2006 2008 2010 2012 −8 −6 −4 −2 2 4 6
Real output
2004 2006 2008 2010 2012 4 5 6 7 8 9 10
Unemployment
2004 2006 2008 2010 2012 −10 −8 −6 −4 −2 2 4 6
Consumption
2004 2006 2008 2010 2012 −40 −30 −20 −10 10 20 30
Investment
Note: Except for unemployment, figures show percentage deviation from a linear trend.
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2004 2006 2008 2010 2012 3.6 3.8 4 4.2 4.4 4.6 4.8 5
Wealth to output
2004 2006 2008 2010 2012 0.55 0.6 0.65 0.7 0.75 0.8
Debt to output
2004 2006 2008 2010 2012 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
Housing value to output
2004 2006 2008 2010 2012 160 170 180 190 200 210 220 230
Housing price index
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2004 2006 2008 2010 2012 −4 −3 −2 −1 1 2 3
TFP with total hours
2004 2006 2008 2010 2012 −3 −2 −1 1 2 3 4
Labor productivity
2004 2006 2008 2010 2012 −1 −0.8 −0.6 −0.4 −0.2 0.2 0.4 0.6 0.8
Labor quality
2004 2006 2008 2010 2012 −5 −4 −3 −2 −1 1 2 3 4
TFP with total labor inputs
Note: Figures show percentage deviation from a linear trend.
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Large decline in main aggregate variables. Households deleveraging process: private debt and housing price plunged. Total factor productivity dropped, but labor productivity and labor quality increased.
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To explore the quantitative properties of environments where recessions are caused by worse financial conditions faced by households. These environments have
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1
Real frictions that make difficult to switch from production of consumption goods to exports or investment. . .
2
Households differing in wealth and job market prospects. . .
3
A financial system used widely by households to buy houses which are inferior goods and not wanted by the super-rich. . .
4
Asset prices respond to market conditions. . .
5
Frictions in the goods market generate movements in measured TFP.
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It is a small open Aiyagari/Krusell-Smith economy with a housing market and a stock market. Borrowing has to be collateralized by the value of housing. The financial terms available are the financial conditions and are subject to shocks. Like in Huo & Rios-Rull(13) there are goods market frictions that generate TFP losses, job market frictions, and adjustment costs to move into tradable production.
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A recession can be triggered by financial shocks to households. It shares most of the features of the Great Recession. Insufficient reductions in assets (housing and stocks) prices. For now!!
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Continuum of households that live forever (β), are subject to uninsurable idiosyncratic and aggregate shocks. Hholds care about quantities and number of varieties of nontradables. cN = (∫ IN c
1 ρ
Ni di
)ρ
▶ Under equal consumption of each variety:
cN Iρ
N =
[∫ IN c
1 ρ
Ni di
]ρ
Households have to search for varieties, its number is a choice. IN = d Ψd(Qg) Ψd(Qg): Probability (per search unit) of finding a variety. Households also like tradables and housing and dislike goods searching u [cA(cN Iρ
N, cT), h, d]
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Household skill type is ϵ, follows a Markov chain Γϵ,ϵ′. Moves slowly and accommodates opportunities to get rich. Households either have a job e = 1 or not e = 0.
▶ Type-dependent exogenous job destruction rate δϵ
n.
▶ Job finding rate is type independent and depends on job creation by firms (workers
are rationed, it is like no matching function in labor market but hiring costs) (Fang
and Nie (2013)).
Households have assets a. These assets can be allocated to (frictionless) houses and/or to financial assets with a collateral constraint. The poor will have some housing wealth and a mortgage, the rich houses and shares of the economy’s mutual fund.
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Tradables.
▶ Measure one of competitive firms. ▶ (Large) Adjustment costs to both capital and labor. ▶ Its output is used for exports, investment, and (part of) consumption. ▶ F T(k, ℓ) may have decreasing returns.
Nontradables
▶ Measure one of monopolistic firms each one producing a different variety. ▶ Each firm/variety has a measure one of locations, each location has its own
production function F N(k, ℓ1, ℓ2).
⋆ ℓ1 Committed to the location. (Sales staff) ⋆ ℓ2 Can be reallocated within the period. (Production Staff ) ▶ Locations may or may not be filled (get a customer). They produce only for
consumption.
▶ Firms post prices before the location is filled. Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 12 / 65
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Households look for varieties. CRS matching function M(D, 1). Market tightness is Qg = 1
D .
Random search. There is no possibility of attracting more customers with lower prices (we are working on a paper where there is shopping and searching simultaneously).
▶ The probability that a shopper finds a firm-variety: Ψd(Qg) = M
D
▶ The probability that a firm finds a shopper is the measure of filled locations or of
consumers buying the good: Ψf (Qg) = M
1 = M(D, 1).
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Workers are rationed. Firms hire as many workers as they wish paying hiring costs. (like a vacancy filling probability of 1, with hiring costs). Employment: N = NN + NT. Same job finding probability across types: Φe =
V 1−N .
Wages are determined via the following formula logw − logw = εw ( logY − logY ) It simplifies things.
Gornemann, Kuester, and Nakajima (2012).
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Total housing H is in fixed supply. Negative financial assets (b′ < 0) are (undefaultable) mortgages.
▶ Its interest rate 1
q is predetermined at borrowing time,
q(θ, b′) = { 1, if b ≥ 0
1 1+r∗ − ς(θ),
if b < 0
▶ Mortgages have to be collateralized by housing
q(θ, b) b ≥ −λ(θ) ph(S) h
Positive financial assets (b > 0) are shares of a mutual fund.
▶ Its return is stochastic. Possible Capital gains and loses. ▶ The return is
R(S, S′, b) = { 1 + r(S, S′), if b ≥ 0 1, if b < 0.
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A household is characterized by {ϵ, e, a}. Let X denote the measure over types x = {ϵ, e, a}. The vector of aggregate state variables is S = {θ, B, KN, KT, NN, NT, X} Here B is the net foreign asset position. K and N are predetermined factor inputs. Hence either we do Krusell-Smith or the transition after an unforeseen shock. Today, we do the latter.
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V (S, ϵ, e, a) = max
cN,i,cT ,IN,h,d u(cA, h, d)+
β ∑
ϵ′,e′,θ′
Πθ
θ,θ′ Πw e′|e,ϵ(S′) Πε ϵ,ϵ′ V [S′, ϵ′, e′, a′(S′, b, h)]
subject to ∫ IN pi(S)cN,i + cT + ph(S)h + q(θ, b)b = a + 1e=1w(S)ϵ + 1e=0 w BC a′(S′, b, h) = ph(S′)h + R(S, S′, b)b AA q(θ, b)b ≥ −λ(θ)ph(S)h FC IN = d Ψd[Qg(S)] SC S′ = G(S, θ′) RE
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At each location, the production function is F N(k, ℓ1, ℓ2) = zNkα0ℓα1
1 ℓα2 2
▶ k and ℓ1 are pre-installed. ℓ2 is variable to meet different demands.
The demand function is given by c(pi, S, x) = [
pi p(S)
]
ρ 1−ρ cN(S, x)
When a shopper wants to buy c units of goods at a location, the amount of variable labor ℓ2 needed to produce c is f ℓ(c, k, ℓ1) = ( c−1zNkα0ℓα1
1
)− 1
α2
At the posted price pi, the total variable labor needed is ℓ2 ≥ Ψf [Qg(S)] ∫ f ℓ[c(pi, S, x), k, ℓ1]d(x, S) D(S)
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ΩN(S, k, n) = max
i,v,pi ℓ1,ℓ2
Ψf [Qg(S)]pi ∫ c(pi, S, x) dx − w(S)ℓ − i − κv + ∑
θ′
Πθ
θ,θ′ ΩN(S′, k′, n′)
1 + r ∗ subject to ℓ2 ≥ Ψf [Qg(S)] ∫ f ℓ[c(pi, S, x), k, ℓ1]d(x, S) D(S) DC ℓ1 + ℓ2 = n ϵ(S) SL k′ = (1 − δk)k + i − ϕN(k, i) LMK n′ = [1 − δn(S)]n + v LML S′ = G(S, θ′) RE
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ΩT(S, k, n) = max
i,v F T(k, ℓ) − w(S)ℓ − i − κv − ϕT,n(n′, n)
+ ∑
θ′
Πθ
θ,θ′ ΩT(S′, k′, n′)
1 + r ∗ subject to k′ = (1 − δk)k + i − ϕT,k(k, i) ℓ = n ϵ(S) n′ = [1 − δn(S)]n + v S′ = G(S).
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Financial wealth in the economy is L+ = ∫
b>0
b(S, ϵ, e, a) dx Mortgages in the economy are L− = ∫
b<0
−b(S, ϵ, e, a) dx Net foreign asset position of the country (the mutual fund owns all firms) B = L+ − ( ΩN(S) − πN(S) + ΩT(S) − πT(S) + 1 1 + r ∗ L− ) The realized rate of return is 1 + r(S, S′) = ΩN(S′) + ΩT(S′) + (1 + r ∗)B + L− L+
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An equilibrium is a set of decision rules and values for households, firms’ values and decision rules, and a set aggregate variables of aggregate states, such that: Households’ and firms’ policy functions and value functions solve the corresponding program problems. Aggregate searching consistence D(S) = ∫ d(S, x) dx, Nontradable prices satisfies p(S) = pi(S, KN, NN) dx, Housing market clears ∫ h(S, x) dx = H.
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Average separation probability and labor force quality δn(S) = ∑
ϵ δn(ϵ)n(ϵ)
N , ϵ(S) = ∑
ϵ ϵn(ϵ)
N Rate of return to the mutual fund satisfies 1 + r(S, S′) = ΩN(S′) + ΩT(S′) + (1 + r ∗)B + ∫
b<0 b(S, x)
∫
b>0 b(S, x)
Wage satisfies logw(S) − logw = εw ( logY (S) − logY ) The law of motion G(S) is consistent with households’ decisions and employment dynamics.
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Preferences u(cA, h, d) = 1 1 − σc ( cA − ξd d1+γ 1 + γ )1−σc + v(h) where there is an Armington aggregator for consumption cA = [ ω (cNIρ
N)
η−1 η
+ (1 − ω)c
η−1 η
T
]
η η−1
and houses are inferior goods. v(h) = {
ξh 1−σ1
h (h + h1)1−σ1 h ,
if h < h
ξh 1−σ2
h (h + h2)1−σ2 h ,
if h ≥ h.
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Housing Consumption
Housing utility function Policy function: consumption vs housing
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Production function F N(k, ℓ1, ℓ2) = zN kα0 ℓα1
1 ℓα2 2 ,
F T(k, ℓ) = zTkθ0ℓθ1 Capital adjustment cost in the nontradable goods sector ϕN(i, k) = εN 2 ( i k − δk )2 k Capital and employment adjustment cost in the tradable goods sector ϕT,k(i, k) = εT,k 2 ( i k − δk )2 k, ϕT,n(n′, n) = εT,n 2 (n′ n − 1 )2 n Matching technology M(D, T) = νDµT 1−µ
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A period is half a quarter.
Parameter Value Risk aversion for consumption, σc 2.0 Risk aversion for housing, σ1
c
2.0 Risk aversion for housing, σ2
c
10.0 Curvature of shopping, γ 2.0 Elasticity of substitution bw tradables and nontradables, η 0.80 Cutoff value for housing utility, h 2.0 Price markup, ρ 1.1 Loan to value ratio, λ 0.85 Interest rate for international bonds, r ∗ 4%
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Target Value Parameter Value Wealth to output ratio 4.70 β 0.985 Housing value to output ratio 1.67 ξh 0.61 Debt to output ratio 0.75 ϵ4 12.51 Share of tradables 0.30 ω 0.95 Occupancy Rate 0.81 ν 0.81 Capital to output ratio 2.75 δk 0.006 Labor Share in nontradables 0.64 α0 0.27 α1 = α2 —— α1 0.36 Labor Share in tradables 0.66 θ1 0.66 1.4θ0 + θ1 = 1 —— θ0 0.23 Vacancy cost to output ratio 0.02 κ 0.42 Home production to lowest earning ratio 0.50 w 0.07 Units Parameters Output 1 zN 0.85 Relative price of nontradables 1 zT 0.44 Market tightness in goods markets 1 ξd 0.03
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Target Value Parameter Value Job duration for type 1 1.5 year δ1
n
0.083 Job duration for type 3 5 year δ3
n
0.025 Job duration for type 4 5 year δ4
n
0.025 Unemployment rate 6% δ2
n
0.047 Wealth Gini index 0.82 Πϵ
1,4
0.0003 Earning Gini index 0.64 Πϵ
4,1
0.0031 Earning autocorrelation 0.95 Πϵ
1,1
0.9894 Earning stdev 0.12 Πϵ
2,2
0.9860 Transition matrix ϵ1 ϵ2 ϵ3 ϵ4 ϵ1 0.9894 0.0101 0.0000 0.0003 ϵ2 0.0067 0.9860 0.0067 0.0003 ϵ3 0.0000 0.0101 0.9894 0.0003 ϵ4 0.0031 0.0031 0.0031 0.9904 Skill Value 0.2259 0.4496 0.8948 12.50
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Target Value Parameter Value Decrease of investment 35% εN 1.25 Increase of tradable output 1.5% εT,n 2.80 Symmetry of tradable adjustment costs εT,k = εT,n εT,k 2.80 Decrease of TFP 1% µ 0.50 Wage elasticity w.r.t. output 0.45 εw 0.45
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. .
1
Decrease the loan to value ratio from 0.85 to 0.75 in period 1, with flexible and fixed wage. . .
2
Decrease the loan to value ratio from 0.85 to 0.75 gradually in 4 years, with flexible and fixed wage. . .
3
Increase the interest rate for borrowing from 4% to 4.3% in period 1, with flexible and fixed wage. . .
4
increase the interest rate for borrowing from 4% to 4.3% gradually in 4 years, with flexible and fixed wage. . .
5
increase both the loan to value ratio from 0.85 to 0.75, and the interest rate for borrowing from 4% to 4.3% gradually in 4 years, with flexible wage.
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1 2 3 4 5 6 7 8 9 10 −3.5 −3 −2.5 −2 −1.5 −1 −0.5 0.5
Real output
1 2 3 4 5 6 7 8 9 10 5 6 7 8 9 10 11
Unemployment
1 2 3 4 5 6 7 8 9 10 −5 −4 −3 −2 −1 1
Consumption
1 2 3 4 5 6 7 8 9 10 −35 −30 −25 −20 −15 −10 −5 5
Investment
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1 2 3 4 5 6 7 8 9 10 −3.5 −3 −2.5 −2 −1.5 −1 −0.5 0.5
Wealth
1 2 3 4 5 6 7 8 9 10 −14 −12 −10 −8 −6 −4 −2
Debt
1 2 3 4 5 6 7 8 9 10 −9 −8 −7 −6 −5 −4 −3 −2 −1
Housing price
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1 2 3 4 5 6 7 8 9 10 −1 −0.8 −0.6 −0.4 −0.2 0.2 0.4
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −1 −0.5 0.5 1 1.5
Labor Productivity
1 2 3 4 5 6 7 8 9 10 −0.2 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6
Labor quality
1 2 3 4 5 6 7 8 9 10 −1.2 −1 −0.8 −0.6 −0.4 −0.2 0.2
TFP with total labor inputs
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1 2 3 4 5 6 7 8 9 10 −5 −4 −3 −2 −1 1
Nontradable sector
1 2 3 4 5 6 7 8 9 10 −0.5 0.5 1 1.5 2
Tradable sector
1 2 3 4 5 6 7 8 9 10 8 9 10 11 12 13 14 15 16
Net export/output ratio
1 2 3 4 5 6 7 8 9 10 −5 −4 −3 −2 −1 1
Aggregate search
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1 2 3 4 5 6 7 8 9 10 −15 −10 −5 5 10 15 Type 1 Type 2 Type 3 Type 4
Housing
1 2 3 4 5 6 7 8 9 10 −40 −30 −20 −10 10 20 30 Type 1 Type 2 Type 3 Type 4
Debt
1 2 3 4 5 6 7 8 9 10 −10 −8 −6 −4 −2 2 4 Type 1 Type 2 Type 3 Type 4
Consumption
1 2 3 4 5 6 7 8 9 10 2 4 6 8 10 12 14 16 Type 1 Type 2 Type 3 Type 4
Unemployment rate
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1 2 3 4 5 6 7 8 9 10 −2.5 −2 −1.5 −1 −0.5 0.5
Real output
1 2 3 4 5 6 7 8 9 10 5.5 6 6.5 7 7.5 8 8.5 9 9.5
Unemployment
1 2 3 4 5 6 7 8 9 10 −4 −3.5 −3 −2.5 −2 −1.5 −1 −0.5 0.5
Consumption
1 2 3 4 5 6 7 8 9 10 −25 −20 −15 −10 −5 5
Investment
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1 2 3 4 5 6 7 8 9 10 −3 −2.5 −2 −1.5 −1 −0.5 0.5
Wealth
1 2 3 4 5 6 7 8 9 10 −10 −8 −6 −4 −2
Debt
1 2 3 4 5 6 7 8 9 10 −7 −6 −5 −4 −3 −2 −1
Housing price
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1 2 3 4 5 6 7 8 9 10 −0.5 −0.4 −0.3 −0.2 −0.1 0.1 0.2
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −0.6 −0.4 −0.2 0.2 0.4 0.6 0.8 1 1.2
Labor Productivity
1 2 3 4 5 6 7 8 9 10 −0.2 0.2 0.4 0.6 0.8 1 1.2
Labor quality
1 2 3 4 5 6 7 8 9 10 −1 −0.8 −0.6 −0.4 −0.2 0.2 0.4
TFP with total labor inputs
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 41 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −2.5 −2 −1.5 −1 −0.5
Real output
1 2 3 4 5 6 7 8 9 10 6 6.5 7 7.5 8 8.5 9 9.5
Unemployment
1 2 3 4 5 6 7 8 9 10 −4 −3.5 −3 −2.5 −2 −1.5 −1 −0.5
Consumption
1 2 3 4 5 6 7 8 9 10 −30 −25 −20 −15 −10 −5 5
Investment
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 42 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −3.5 −3 −2.5 −2 −1.5 −1 −0.5
Wealth
1 2 3 4 5 6 7 8 9 10 −8 −7 −6 −5 −4 −3 −2 −1
Debt
1 2 3 4 5 6 7 8 9 10 −9 −8 −7 −6 −5 −4 −3 −2 −1
Housing price
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 43 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −0.6 −0.5 −0.4 −0.3 −0.2 −0.1 0.1
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −0.6 −0.4 −0.2 0.2 0.4 0.6 0.8 1 1.2
Labor Productivity
1 2 3 4 5 6 7 8 9 10 0.2 0.4 0.6 0.8 1 1.2 1.4
Labor quality
1 2 3 4 5 6 7 8 9 10 −0.9 −0.8 −0.7 −0.6 −0.5 −0.4 −0.3 −0.2 −0.1
TFP with total labor inputs
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 44 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −2.5 −2 −1.5 −1 −0.5
Real output
1 2 3 4 5 6 7 8 9 10 6 6.5 7 7.5 8 8.5 9 9.5
Unemployment
1 2 3 4 5 6 7 8 9 10 −4 −3.5 −3 −2.5 −2 −1.5 −1 −0.5
Consumption
1 2 3 4 5 6 7 8 9 10 −25 −20 −15 −10 −5 5
Investment
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 45 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −3.5 −3 −2.5 −2 −1.5 −1 −0.5
Wealth
1 2 3 4 5 6 7 8 9 10 −8 −7 −6 −5 −4 −3 −2 −1
Debt
1 2 3 4 5 6 7 8 9 10 −8 −7 −6 −5 −4 −3 −2 −1
Housing price
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 46 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −0.5 −0.4 −0.3 −0.2 −0.1 0.1 0.2
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −0.6 −0.4 −0.2 0.2 0.4 0.6 0.8 1 1.2
Labor Productivity
1 2 3 4 5 6 7 8 9 10 0.2 0.4 0.6 0.8 1 1.2 1.4
Labor quality
1 2 3 4 5 6 7 8 9 10 −0.9 −0.8 −0.7 −0.6 −0.5 −0.4 −0.3 −0.2 −0.1
TFP with total labor inputs
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 47 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −3.5 −3 −2.5 −2 −1.5 −1 −0.5
Real output
1 2 3 4 5 6 7 8 9 10 6 6.5 7 7.5 8 8.5 9 9.5 10
Unemployment
1 2 3 4 5 6 7 8 9 10 −6 −5 −4 −3 −2 −1
Consumption
1 2 3 4 5 6 7 8 9 10 −50 −40 −30 −20 −10 10
Investment
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 48 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −5 −4 −3 −2 −1
Wealth
1 2 3 4 5 6 7 8 9 10 −16 −14 −12 −10 −8 −6 −4 −2
Debt
1 2 3 4 5 6 7 8 9 10 −14 −12 −10 −8 −6 −4 −2
Housing price
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 49 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −1.4 −1.2 −1 −0.8 −0.6 −0.4 −0.2
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −1.5 −1 −0.5 0.5 1
Labor Productivity
1 2 3 4 5 6 7 8 9 10 0.2 0.4 0.6 0.8 1 1.2 1.4
Labor quality
1 2 3 4 5 6 7 8 9 10 −1.5 −1 −0.5
TFP with total labor inputs
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 50 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −1.6 −1.4 −1.2 −1 −0.8 −0.6 −0.4 −0.2 0.2
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −1.5 −1 −0.5 0.5 1
Labor Productivity
1 2 3 4 5 6 7 8 9 10 −0.2 0.2 0.4 0.6 0.8 1 1.2
Labor quality
1 2 3 4 5 6 7 8 9 10 −2 −1.5 −1 −0.5 0.5
TFP with total labor inputs
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 51 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
All the experiments generate
▶ Drop of output, employment, investment and consumption. ▶ Drop of wealth, housing price and debt. ▶ Drop of total productivity, increase of labor quality and labor productivity.
With fixed wage, the recovery of employment is much slower. With slow change of the financial condition, the initial drop of debt is smaller, which is the case in the data. A decrease of the loan to value ratio λ and an increase of borrowing cost have similar effects.
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 52 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 0.2 0.4 0.6 0.8 1 1.2 1.4
Real output
1 2 3 4 5 6 7 8 9 10 4 4.2 4.4 4.6 4.8 5 5.2 5.4 5.6 5.8
Unemployment
1 2 3 4 5 6 7 8 9 10 0.5 1 1.5 2 2.5
Consumption
1 2 3 4 5 6 7 8 9 10 −5 5 10 15 20
Investment
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 53 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 0.5 1 1.5 2 2.5
Wealth
1 2 3 4 5 6 7 8 9 10 2 4 6 8 10 12
Debt
1 2 3 4 5 6 7 8 9 10 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Housing price
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 54 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −0.05 0.05 0.1 0.15 0.2 0.25 0.3 0.35
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −0.5 −0.4 −0.3 −0.2 −0.1 0.1 0.2 0.3 0.4
Labor Productivity
1 2 3 4 5 6 7 8 9 10 −0.7 −0.6 −0.5 −0.4 −0.3 −0.2 −0.1
Labor quality
1 2 3 4 5 6 7 8 9 10 0.1 0.2 0.3 0.4 0.5 0.6 0.7
TFP with total labor inputs
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 55 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 0.75 0.85
Loan to value ratio λ
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 56 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −2 −1.5 −1 −0.5 0.5 1 1.5
Real output
1 2 3 4 5 6 7 8 9 10 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5
Unemployment
1 2 3 4 5 6 7 8 9 10 −3 −2 −1 1 2 3
Consumption
1 2 3 4 5 6 7 8 9 10 −30 −20 −10 10 20
Investment
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 57 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −2 −1.5 −1 −0.5 0.5 1 1.5 2 2.5
Wealth
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8
Debt
1 2 3 4 5 6 7 8 9 10 −6 −4 −2 2 4 6
Housing price
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 58 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
1 2 3 4 5 6 7 8 9 10 −0.8 −0.6 −0.4 −0.2 0.2 0.4 0.6
TFP with total hours
1 2 3 4 5 6 7 8 9 10 −0.6 −0.4 −0.2 0.2 0.4 0.6 0.8
Labor Productivity
1 2 3 4 5 6 7 8 9 10 −0.8 −0.6 −0.4 −0.2 0.2 0.4 0.6 0.8 1
Labor quality
1 2 3 4 5 6 7 8 9 10 −1 −0.8 −0.6 −0.4 −0.2 0.2 0.4 0.6
TFP with total labor inputs
Sudden change of λ Slow change of λ
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 59 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
All the experiments generate
▶ Drop of output, employment, investment and consumption. ▶ Drop of wealth, housing price and debt. ▶ Drop of total productivity, increase of labor quality and labor productivity.
With fixed wage, the initial drop of employment is larger and the recovery is much slower. With slow change of the financial condition, the initial drop of debt is smaller, which is the case in the data. A decrease of the loan to value ratio λ and an increase of borrowing cost have similar effects.
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 60 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
In the data: housing price ↓ 20%, housing value ↓ 36%. In the model: housing price ↓ 6% to 14%. Problem: Rich households with deep pockets pick up the slack. Not so much in the real world. Large decline of housing price may force poor households default their debt. Not allowed in the model. Solution: Housing utility function with more curvature. Smaller initial load to value ratio λ gives larger room for drop of housing price without default.
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 61 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
A three-piece housing utility function.
1.5 2 2.5 3 3.5
A B C
A: greater curvature to prevent rich households from expanding houses. B: greater curvature to prevent super rich households from expanding houses. C: upper bound for housing holding.
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 62 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
0.2 0.3 0.4 0.5 0.6 0.7
Consumption
Rich households will not increase their housing by much due to decreasing marginal utility. Housing price has to drop more to induce poor households not to sell their houses.
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 63 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
We have a recession generated purely by increased difficulties to borrow on the part of households The recession comes together with
▶ TFP loses ▶ Drop in Housing prices (movements too sharp because of lack of house frictions) ▶ Drop in Stock Market
Still insufficient drop in asset prices The literature is trying hard to get this (Midrigan and Philippon (2011), Guerrieri and
Lorenzoni (2009)) with limited success.
Still ways to go.
Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 64 / 65
. .. . . .. . . .. . . .. . ,. . .. . . .. . . .. .
Fang, Lei and Jun Nie. 2013. “Education, Human Capital and U.S. Labor Market Dynamics.” Presented at MidWest Macro Meetings. Gornemann, Nils, Keith Kuester, and Makoto Nakajima. 2012. “Monetary Policy with Heterogeneous Agents.” Mimeo, FRB Philadelphia. Guerrieri, Veronica and Guido Lorenzoni. 2009. “Liquidity and Trading Dynamics.” Econometrica 77 (6):1751–1790. Midrigan, V. and T. Philippon. 2011. “Household Leverage and the Recession.” NYU Working Paper FIN-11-038, New York University. Huo & R´ ıos-Rull (UMN, Mpls Fed, CAERP) Financial Frictions & Great Recessions University of Mannheim 65 / 65